Continental Posts Net Of $35 Million

The banking firm, parent of Continental Illinois National Bank and Trust Co. of Chicago, said it sharply reduced its dependence on borrowings from the Federal Reserve and a ``safety net`` of special funding arrangements made with a number of banks during its financial rescue a year ago.

The profit was down slightly from the earnings of $37.3 million reported in the second period and $39.3 million in the first quarter.

But it was sharply above the $4 million net income posted by Continental during last year`s third quarter, when the Federal Deposit Insurance Corp. acquired $3.5 billion in poor loans from Continental Bank and injected $1 billion of fresh capital into the ailing institution.

Continental`s management said a comparison of results with the year-earlier period wasn`t meaningful because of the restructuring that took place on Sept. 26, 1984.

For the first nine months, the holding company reported net income of $112.4 million, or 40 cents a share, in contrast to a record $1.124 billion loss in the year-earlier period.

John E. Swearingen, chairman of the holding company, said the banking firm has made ``substantial progress in reducing our dependence on special funding arrangements, although our earnings continue to suffer from the premiums we pay for funds.``

Swearingen said Continental`s borrowings on Sept. 30 were $934 million from the special bank funding facility and zero from the Federal Reserve. Its Fed borrowings three months earlier were $540 million and it had also borrowed $2 billion from the bank fund.

``They`re making progress, but they still have a long way to go,`` said Thomas J. Flynn III, banking analyst at Morgan Stanley & Co. ``But the new senior management seems to be taking a very orderly and conservative viewpoint in rebuilding the bank and its markets.``

Flynn said Continental ``still has to get the questions`` of its reliance on the funding safety net and its arrearages on payments of dividends on its preferred stock behind it.

``You have to get the crutches away from the patient and see if it can walk on its own,`` he said. ``Then you can build some momentum.``

The income reported for this year`s third quarter was after an extraordinary loss of $23 million, which Continental said stemmed from a decision to carry forward its 1984 loss and apply it to future taxable income. That reversed an earlier decision to carry back the loss posted in 1984`s second quarter, which was reflected in Continental`s 1984 annual financial statements. At that time, the firm recorded a receivable of $39.5 million for prior taxes paid.

William S. Ogden, chairman of Continental Bank, noted that the bank`s results have been ``relatively flat`` during the last year partly because of

``soft loan demand and problems in certain sectors of the world economy.``

Unlike several other major banks, which reported big increases in profits from foreign exchange and securities trading, Continental said its results from those operations were little changed from the second quarter.

``They`re still operating under this cloud from their previous problems,`` said Flynn. ``Until they get out from under it, they can`t be very aggressive in seeking business.``

However, Ogden said its primary capital ratio rose to 7.83 percent of assets in the quarter from 7.48 percent June 30, making it ``one of the strongest of the major banks.``

Ogden said the bank intends to put greater emphasis in the future on building services that generate non-loan income, improving its net interest margins and adding to liquidity.

The bank transferred another $90 million of poor-quality loans to the FDIC in the quarter, bringing the total acquired by the agency to almost $4 billion. Continental has the right to turn over an additional $1.023 billion of poor loans to the FDIC by Sept. 26, 1987.

As of Sept. 30, Continental had a total of $913 million in loans classified as nonperforming on its books, up from $911 million three months earlier. Gross chargeoffs were $51 million before recoveries of $21 million and reversals of $14 million on transferred loans that were previously charged off.